2024 Outlook for Canadian Mortgage Rates

Introduction

In December, interest rates on five-year fixed mortgages dropped to levels unseen since May. This drop occurred because central banks signalled that monetary tightening is likely over as inflation approaches the target. Currently, five-year variable rates are around one per cent higher than five-year fixed rates at most of Canada’s major banks.

Borrowers received a late Christmas present with lower rates on certain types of mortgages, as some Canadian lenders expect central banks, including the Bank of Canada, to lower influential interest rates in 2024.

Predicted Interest Rate Cuts in 2024

The Bank of Canada overnight rate started 2023 at 4.25 per cent and finished the year at five per cent, for a rise of 0.75 per cent after a rise of four per cent in 2022. This puts the current Prime Rate at 7.2%. There are some predictions that we will see a two per cent decline in rates by the end of 2024, back to an overnight rate of three per cent. The impacts of this decline could be the story of this year.

If rates drop two per cent, the rate will be 5.2 per cent at the end of 2024. Still higher than the incredibly low rates of 2021, but a meaningful relief for those with debts here.

The Impact of Government Bond Yields on Mortgage Rates

As we covered in our recent article, fixed mortgage rates are directly tied to government bond yields. When bond yields peak, as they did in October, mortgage costs rise. However, when yields dive, as they have recently, some mortgage costs drop. This is particularly true for fixed five-year, insured mortgage terms, which have seen rates fall.

However, lower government bond yields don’t immediately translate to lower rates for variable mortgages or home equity lines of credit. These types of loans must wait for the Bank of Canada to lower the overnight interest rate, which will cause the prime rate to drop, thereby lowering variable rates and home equity lines of credit.

The Impact of Rising Rates on Homeowners

Homeowners had gotten used to low interest rates. While mortgage rates around 6 to 7% have been common in Canadian financial history, the mortgage holders of today are facing the fastest and largest increase in interest rates to this level in over 4 decades. This steep interest rate hike is coinciding with a time when households are facing historically high levels of debt and higher cost of living.

This raises questions around the growing financial pressure on mortgage holders, and the impact that their resulting decisions could have on the overall economy. In a context when mortgage holders are paying higher interest rates for a longer period, housing affordability remains an issue.

These borrowers may find themselves in more precarious financial situations. As a result, these larger mortgage payments are making the Canadian economy more susceptible to negative shocks or downturns. Many mortgage consumers have already experienced the effects of higher rates.

In fact, since the beginning of the rate hike in March 2022, 1 out of 3 borrowers have gradually seen their monthly mortgage payment increase. This is particularly true for those who have a variable rate term on their mortgage loan.

Additionally, according to the Government of Canada Residential Mortgage Industry report published in the Fall of 2023, more than 290,000 mortgage borrowers renewed their mortgage in the first half of 2023, with a chartered bank at a higher interest rate: from a mid-5% for a 5-year fixed rate to over 7% for a variable rate. In 2024 and 2025, an estimated 2.2 million mortgages will be facing interest rate shock, representing 45% of all outstanding mortgages in Canada.

Most of these borrowers contracted their fixed-rate mortgages at record-low interest rates and, most likely, at or near the peak of housing prices around 2020 – 2021. This holds true for households who took out a mortgage when buying their new home. It also applies to the numerous existing homeowners that used the increased equity on their property by refinancing and taking cash out for consumption.

Current Mortgage Rates in Canada

Fixed-rate mortgage rates are priced off of Government of Canada 5-year bond yields. While sinking bond yields helped soften fixed mortgage rates in December, they have remained unchanged since the beginning of the new year. Our research on current mortgage rates in Canada reveals that as of January 5, 2024, five-year fixed mortgage rates could be found around 5%. Variable mortgage rates, however, will remain elevated until the Bank of Canada reduces its overnight rate. That may not happen until April or June.

Conclusion

With the predicted interest rate cuts in 2024 and the current mortgage rates in Canada, homeowners and potential buyers should keep a close eye on the market trends. Understanding the current mortgage market trends can help homeowners make informed decisions about buying, and refinancing their homes. As always, it’s important to consult with a knowledgeable mortgage broker, such as TheBroker.ca Ltd., to understand all the factors that go into these rates and to find the best solution for your situation.

We offer a complimentary no-obligation consultation. Book your Complimentary Consultation today, and let us help you understand the details that will guide you on your path to a suitable mortgage solution.

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This article was brought to you by TheBroker.ca Ltd., a mortgage brokerage that is licensed with the Financial Services Regulatory Agency of Ontario (FSRA), which regulates businesses in the financial sector. The Principal Broker Sash Trajkovski has over 20 years of real estate and mortgage experience in the Ontario marketplace. You can verify our licenses by visiting the following links from FSRA’s website: our corporate license and Principal Broker license. Our mortgages services are available to all residents of Ontario.